I.R.S. to Ask Working Poor for Proof on Tax C

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From the NY Times
I.R.S. to Ask Working Poor for Proof on Tax Credits
By MARY WILLIAMS WALSH

The Internal Revenue Service is planning to ask more than four million of the working poor who now claim a special tax credit to provide the most exhaustive proof of eligibility ever demanded of any class of taxpayers.

The I.R.S., trying to prevent errors and cheating, says it needs greater proof of eligibility months before people claim the credit on their tax returns because its efforts to find errors through audits after the fact have not worked. Treasury officials estimate that $6.5 billion to $10 billion is lost to improper payments each year.

But some tax experts criticize the higher burden of proof as unfair and a wasteful allocation of scarce I.R.S. enforcement dollars. They say that corporations, business owners, investors and partnerships deprive the government of many times what the working poor ever could — through both illegal means and legal shelters — yet these taxpayers face no demands to prove the validity of their claims in advance with certified records and sworn affidavits.

Others warn that the proposed I.R.S. rules will set a standard of proof so high that it will be difficult, and in some cases impossible, for honest taxpayers to meet it. As a result, some people entitled to the tax credit will no longer receive it. And those who do manage to file successful claims will almost certainly have to pay commercial tax preparers more for helping them with the extra paperwork.

"There is this double standard," said Robert Greenstein, executive director of the Center on Budget and Policy Priorities, a research group in Washington financed mainly by large foundations. "The losses are larger in other areas of the tax code, but somehow a different standard gets applied to this."

Nina E. Olson, the I.R.S. taxpayer advocate, said in her report to Congress this year that two-thirds of audited claims for the tax credit were eventually approved.

The new rules apply to the earned-income tax credit, a provision enacted in 1975 and expanded several times. The credit has long had bipartisan support because it has lifted large numbers of people out of poverty without offering the sort of assistance often derided as handouts.

Instead of conventional welfare benefits, the earned-income tax credit provides an offset for the Social Security taxes low-income workers have already paid, along with a credit based on their earnings that is intended to give them an incentive to work. The credits vary according to income and family size, but no household with earned income above $34,692 is eligible.

The average tax credit, paid by the government by check, was $1,976 for households with children in 2001. That is less than the average food stamp benefit for households with children that year, $2,904. But the I.R.S.'s proposed rules would make it much harder to qualify for the tax credit than for food stamps.

Republicans and Democrats have both supported expanding the tax credit, but as the cost of the program has risen, many Republicans have been vehement in saying that the program is riddled with errors and fraud.

President Bush has praised the tax credit. But his administration has also complained about fraud, and the president has asked Congress for $100 million and 650 new employees to identify potentially erroneous claims before any money is paid out.

There is a similar effort with federally subsidized school lunches. Eric Bost, the under secretary of agriculture for food and nutrition, has increased efforts to weed out students who officials say are ineligible for free or subsidized school meals.

Asked about the I.R.S. proposal, the Treasury issued a statement saying it was committed to reducing "the unacceptably high error rate" and "to get the benefit to those who are entitled but only to those that truly qualify."

A Treasury official who insisted on not being identified said it was unfair to judge the size of the overpayment problem on the basis of just one year's tax credit, because the overpayments can continue year after year until each minor child listed on a false claim turns 18.

"It's a permanent thing," she said. "The I.R.S. tends to take things that are permanent very seriously, and put a lot of resources into them."

She added that screening out false claimants in advance could be characterized as a benefit to the poor, because such taxpayers would no longer have to have their claims audited, or scrounge for a way to pay back the money with interest if their claims are denied.

"These people didn't invest the money they got in the earned-income tax credit," she said. "They went out and bought their kids sneakers."

The new measures, which are expected to be published for public comment shortly, are scheduled to begin in July, when the first 45,000 taxpayers who fit into a "high-error category" will be asked to submit proof of their eligibility within six months. The program will accelerate to two million taxpayers in 2004. Eventually some four million "high error" claimants — a fifth of the 19 million who now claim the tax credit — will be required to submit advance proof of their eligibility.

The high-error category encompasses all claimants except married taxpayers filing joint returns and single mothers; it includes fathers with sole custody of children, grandparents, aunts, uncles, foster parents and others. They will have to provide papers proving that the relationship with the children claimed is as claimed, and that the children lived with them for at least six months of the year.

Only a few types of evidence will be acceptable to the I.R.S., and some are documents that will be difficult or impossible for people to get within the six-month deadline. To prove their relationships to children, for example, they are expected to produce marriage certificates, in some cases for other people's marriages; for marriages that took place abroad; and in a few cases for marriages of great-grandparents and great-great-grandparents.

Even American weddings may be hard to document adequately in less than six months. The State of California, for example, warns on its Web site that it may take "up to two to three years" to issue copies of marriage certificates, "due to budgetary constraints." The State of Ohio does not even issue copies of marriage certificates, only "marriage abstracts," which are not certified documents and take six months to obtain in any case.

New York State will not issue certificates to people who were married in New York City. New York City will not issue the certificates to anyone but the husband and wife, "or someone with written authorization from them." The I.R.S. plan does not offer any guidelines for the children of couples in common-law marriages.

To prove where a child lived, the I.R.S. will require claimants to produce school records, medical records, leases or similar documents that show both the filer's and the child's names and address, and state specifically the range of dates when they lived there together.

Filers who have no such documents will be allowed to produce instead a sworn affidavit from a school official, employer, member of the clergy or other person in a quasi-official capacity, specifically stating under penalty of perjury that he or she has "personal knowledge" that the taxpayer and child lived together during the dates cited. An affidavit from a landlord, who may live far away, would be accepted, but not one from a building superintendent who lives on the premises.

This requirement contrasts with the proof needed to get food stamps. Food stamp offices rely heavily on third-party statements, but accept them from neighbors, building managers and others likely to know the living arrangements of recipients. And the food stamp offices do not require these third parties to swear under penalty of perjury that they have "personal knowledge."

The food stamp error rate is estimated at 7 percent.

An I.R.S. briefing paper on the new rules states that in 1999 the Treasury lost $8.5 billion to $9.9 billion by paying earned-income tax credits to filers who should not have received them. A separate analysis, by two Treasury Department specialists, says subsequent measures may have reduced these erroneous payments by $2 billion.

By comparison, corporations managed to sidestep as much as $54 billion in 1998, by hiding about $155 billion in profits in tax shelters, according to a study by a Harvard economist, Mihir A. Desai.

The I.R.S.'s most recent attempt to measure tax cheating — based on 1988 data and published in 1992 — showed that the biggest tax dodgers by far were people running their own businesses. They cost the Treasury about $38 billion in lost 1992 taxes by failing to report all their income.

The same I.R.S. study found that people who wrongly took tax credits of all types — including earned-income tax credits — cost the Treasury less than $6 billion in 1992.

That 1992 study drew complaints of I.R.S. heavy-handedness from the agency's critics, and Congress stopped appropriating money for comprehensive efforts to measure tax cheating. But money to measure overpayments on the earned-income tax credit survived. From 1993 to 1999, the I.R.S. undertook four studies of how much was improperly paid to the working poor.

These studies showed that there was, in fact, a high rate of erroneous claims for the earned-income tax credit. Some involved cheating. Many more involved disputes over which parent was entitled to the credit for the same child, one aspect of the complexity of this part of the tax code. The errors persist even though 70 percent of all claimants pay tax preparers to file their returns.

"Most of these people are marginal people," said Sheldon S. Cohen, who served as I.R.S. commissioner under President Lyndon B. Johnson. "They don't go to a first-class C.P.A. or tax lawyer. They go to a guy in the neighborhood."

Prompted by the overpayment data, the I.R.S. stepped up its audits of people claiming the earned-income tax credit in 1995. The most recent I.R.S. databook shows that 300,000 people who claimed the credit were audited in 2002, or about one in every 64. By contrast, one of every 120 taxpayers with annual incomes over $100,000 was audited, as were about one in 400 partnerships, which are primarily owned by the wealthy.

Last year, the Office of Management and Budget pronounced the audits of people who claimed the earned-income tax credit "ineffective," and the Treasury created a task force to find a new way of weeding out the erroneous claims.

Mr. Cohen, now a senior counsel at the Washington office of Morgan, Lewis & Bockius, said the government seemed to value more the dollars it paid out than those it was due but failed to collect.

"If they give you money, they want an exact accounting for it," he said. "If they don't collect the money, then they really don't care."